Latest Purchase: AT&T

Last week I wrote a blog post about my candidate stocks for purchase in the month of July. It seemed like a tough call between DAL, GIS, LUV and T. I felt the competition was eventually between the companies LUV and T. Unfortunately for me, LUV published a very strong quarter report, which made the price increase from the low 50’s all up to $57. So I concluded: “Let’s wait on that one to come down again”.

But days after my article the stock price of T dropped just short of 4%. That’s what we like to see if we’re ready to buy a dividend growth stock; a lower price means a higher dividend yield. The reason for the price decline was their announcement of the second quarter report for 2018. AT&T beat their earnings estimates, but missed the revenue expectations, the first one to incorporate results from its new WarnerMedia unit (sixteen days included).

They also reported good news like the better-than-hoped wireless overall business trends and raised their guidance on full-year adjusted EPS, forecasting a $3.50 number versus an expected $3.38. Management also boosted free cash flow expectations to the high end of $21B range (inclusive of deal/integration costs).

Much has been written about AT&T over the last year. Its declining subscriber base due to cord-cutting, the necessity of the TWX merger and the massive debt load have all been covered numerous times by analysts. According to me, there are some good arguments for the bull and bear case.

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Dividend Income June 2018 “What Happened?”

It’s that time of the month again. ☺️ This is only the second time I’m publishing my monthly dividend income and I have to say I already like these regular posts very much. The DGI community reaches out to eachother to read, learn and motivate. My blog is a success already as it gives me the opportunity to communicate with so many people around the world who are in the same boat. It’s so cool! And it motivates me even more to buy (new) dividend growth stocks to only see the snowball effect getting bigger and bigger with time. Just like we want it. Last month my dividend income grew 869% YoY. Let’s see how I did this month.

Dividend Income & Two Increases

The amount of dividend income for June was $127.26. In this month I got two raises as compared to the dividend payment three months ago. Southern Company gave me a nice raise of their dividend with 3.45%. They have a respectful streak of growing their dividends for 16 years. Exxon Mobil paid me 6.49% more than last quarter which was their 35th time increasing their annual dividend. Wow! I’m very pleased with the increase of this Big Oil company after a lower growth rate during the last couple of years. This month excluded dividend payments by the companies ConocoPhilips, IBM, Wells Fargo and Walmart as I sold these positions at the end of 2017 and at the start of 2018. ConocoPhilips paid me $2.28 back in April, whereas IBM, Wells Fargo and Walmart respectively contributed $19.50, $14.82 and $12.75 to my quarterly dividend income.

In June I bought 27 stocks of Starbucks for a price of $54.00. The stock currently trades for about $48 a share, which equals an all-time high of 3% dividend for this company. In the coming days I’ll probably buy another bunch in order to average up my yield on cost. If management sustains the 20% dividend increases a year for the coming two years, then stepping in at a price of $48 will result in a yield on cost of 4.3% in 2020. Surreal!

Selling IBM, Wells Fargo & Walmart

My positions in IBM and Wells Fargo were partially based on Warren Buffett owning large stakes in these companies. When I first bought IBM in 2015 I thought they would hit back in two or three years after finding a formula for monetizing Watson and their big patent portfolio. I was convinced IBM was a regular turnaround story so I built up a nice position in two years. Reality set in when the Oracle of Omaha sold a part of his IBM position for Berkshire Hathaway. Only then I realized that margins would stay under pressure for a longer period of time because of increased competition by more successful competitors in the cloud computing business like Amazon, Apple, Google and Microsoft. Their most recent dividend increase showed a lower growth rate than the years before. So after that announcement I sold my entire position in IBM.

The story of Wells Fargo is more or less the same; I sold my shares because of a slower dividend growth rate. I built my position during two years. It used to be a terrific company, a bit boring, but a steady deliverer. But the stock tanked when Wells Fargo announced they had discovered millions of fake bank and credit card accounts. This is a company which will do fine sooner or later, but I didn’t feel comfortable owning it any longer. In fact, the other day I read Wells Fargo announced an increase of their quarterly dividend with 10%. So they may be already on their way back.

I sold Walmart after the sales and earnings numbers of the fourth quarter of 2017 showed pressured margins and deceleration in e-commerce sales growth. The company increased their dividend with only 2%. At that period in time, Mr. Market offered better alternatives in terms of dividend yield, growth prospects and valuation.

Now, I didn’t sell these positions with a loss, but I surely missed out big wins with Apple, Boeing and JP Morgan as these were the companies I considered as an alternative back then. So my loss is actually the missed compounding of investment in those businesses. Boeing is already a triple and JP Morgan a double as compared to the price levels at which I decided not to buy these stocks but IBM, WFC and WMT. These flawed investments show how important it is to have a smart buy strategy. The oppprtunity costs can be huge.

Breakdown of Dividend Income YoY

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My passive income in the month of June last year was $110.30 so that’s an increase of more than 15%. I know that isn’t close to the YoY dividend growth of 869% for the month of May. But when building a dividend growth stock portfolio you happen to have months that grow bigger and faster than others. A dividend growth of 15% YoY is still solid considering the shake up of my portfolio. You can see the loss of the above mentioned dividend payments has nearly been compensated by the quarterly dividend of DAL, O, PEP, SO and XOM. In June I benefited nicely from my position in XOM which I’ve been building up quite consistently the last three years. The share prices of DAL, O, SO and XOM still look attractive these days.

The dividend income for the month of June leads to the next graph:

A5E37973-0B25-405D-8ECD-4AB58C8E886B.png

My dividend income in the month of March was $130.14 so that’s a decrease of 2.2%. I really don’t like a setback, but sometimes you need to step back and re-assess your portfolio. In contrary, I’m more than pleased that all months of 2018 show a steady upward dividend income in comparison with the same months last year. I really hope the QoQ growth number for September 2018 will be higher than my $127.26 for this month.

Dividend Income FY2018

We are halfway 2018 so the total dividend amount for the first six months is a good indication where I’m heading for this year. I already collected $763.35 this year whereas my total dividend income in 2017 was $827.81. It’s truly inspiring to foresee that the total YoY growth number will be amazing for 2018. The snowball is still rolling. That’s for sure.

I’m very curious how you did this month. Please share your progress and insights.

Dividend Income May 2018 Increased 869% YoY

Well, here we are folks. This is the very first publication of my monthly dividend income. From now on I’ll be posting this information on a monthly basis to track my progress in reaching financial independence. Sharing this information publicly will motivate me even more to buy (new) dividend growth stocks and add them to my basket. I’ll be comparing my dividend income with the amount three months ago and the same month last year. Let’s roll!

The total amount of dividend income in the month of May was $153.68. In this month I got two raises for doing absolutely nothing more than in the month of February. Well, except for continuing to buy quality companies which have a nice streak of dividend increases. Apple increased their dividend with 16% and Tanger Factory Outlets paid me 2.2% more than last quarter. Tanger Factory Outlets became an official Dividend Aristocrat this month by paying a higher dividend than last year. That’s always nice for the statistics. Besides, in February I didn’t possess any stocks of Realty Income in contrary to the month of May. The dividend income was divided by:

Apple (AAP) – $16.06

CVS Caremark (CVS) – $2.00

Realty Income (O) – $3.72

Omega Healthcare (OHI) – $66.00

Tanger Factory Outlets (SKT) – $22.40

AT&T (T) – $43.50

This totals to an amount of $153.68. My dividend income in the month of February was $144.88 so that’s a very welcome increase of 6.1%.

My passive income in the month of May last year was $15.86 so that’s an increase of 869%. Say WHUT? Yes, a 869% increase! The difference comes from loading up the truck with various REIT stocks which have traded at very low valuations last year. This lead to very high dividend yields. REIT stocks have climbed out of the valley lows last weeks. If prices continue to increase; I’m good with that. In case of another price decline I may add to my position of Realty Income and Tanger Factory Outlets. So, according to me, there isn’t really a bad case scenario. During the month of May I also benefited from my nice position in AT&T which I’ve been building up quite conscientiously the last twelve months. The share price of this beaten down stock still looks very appealing.

This leads to the next graph:

4CEFB504-3BE7-4119-84A0-F09D8CD2D3EA.png

I already collected $636.10 this year whereas my total dividend income in 2017 was $827.81. We’re still in the first half year of 2018 so this looks very promising. As you can see I’m moving forward, every year, every month, and with every addition to my stock portfolio. That’s a good feeling. And, we’re already off for the month of June.

I’m very curious how you did this month. Please share your progress and insights.

My First Years of Investing, Part I

In my first article I wrote about my decision to start a blog and my purpose for investing: to achieve financial independence at the age of 55. I truly believe this is within reach if I consistently invest my savings in good dividend growth stocks at a low or reasonable valuation in the years to come. So this will take discipline; discipline to not spend my money on unnecessary things, but also discipline to take into consideration the valuation metrics of dividend growth stocks in my buy decisions.

But, dividend investing hasn’t always been my preferred investing strategy. In fact, I considered it a boring and ineffective way of investing when I started in 2013. I thought it would be insightful to share my last 5 years in investing, my investing results and the psychological aspects which made me decide to radically change my method for achieving financial independence. Hopefully, by reading these series you won’t have to learn some essential lessons in investing the hard way. Like I did. In a strange way, I can now fully reflect on my motivation and (in)decisions in the past. I believe this has only been possible because I’ve found peace of mind by investing in dividend growth stocks instead of chasing the hottest microcaps, hoping for price increases and calculating my returns.

I think it will be a three part series, but we’ll see if that will do.

A Great Idea Without Action Is Not Always A Regret

I’ve always been a guy spending his money. In another era you had physical objects like CDs and hardcopy books. Just like any other person in that epoch I bought a good amount of that stuff. I even liked the sight of CDs and books in my closet and did my best to solve the existential problem of how to archive all that stuff: books on author, age, topic? CDs on performer, music label, music style, era? Besides these cultural doings I also bought a ton of expensive Italian clothing items. I loved the craftmanship, materials and the idea of clothing like a gentilhomme. At the time of all these spending habits of mine (I was 26 at that time) the Stock Market Crash of 2008 set in. It was a horrorshow. Stocks prices fell like crazy. Also in my country, the Nerherlands, beloved stocks of companies like Royal Dutch Shell, Unilever and ING were on sale. A certain stock of a company in the banking and insurance business (I can’t remember its name) traded at prices of a pair of pennies. I still remember me telling my father that if I only had more money I would certainly have bought tens of thousands of stocks of that company, because last year it was selling for tenfold prices. At that time, I was really bummed that I didn’t have more money, because I truly believed that I would have made more than a 1000% return in maybe two, or three years. My father had some doubts about my presumption. He has this laugh, you know. Within a year the company was out of business…

The years after my overconfidence I regularly filled in some forms of online broker firms to open an account. At that time the stock TomTom (AMS: TOM2) had collapsed from €60+ prices in 2008 to €5 (it now trades for €8.50) in 2011-2012. I had often heard some colleagues in the pre-crisis years saying “you should buy TomTom”. This second occurence of a stock price gone south stopped me from opening an online brokerage account. It seemed like gambling. Nobody had foreseen these price movements. The case of TomTom was pretty simple. They sold user friendly navigation software & hardware in the price range of €250 to €400 a piece. It was a total package just like Garmin, everybody bought one. But with the launch of smartphones the only thing necessary for destroying their business model at those days was having an interactive digital map on your smartphone. As these smartphones got more and more capacities and turned into minicomputers, that was exactly what happened. Bye, bye business model. In hindsight, it’s no rocket science. But the smartphone was new, a truly disruptive product. Nobody saw it coming. So I hesitated for a longer period of time to buy stocks.

Things Are Getting Pretty Serious

In 2012 my oldest daughter was born, a true star. I had already transformed from a guy spending his money into a man saving his money to be able of taking care of my family. But, a new human life, totally dependent and pure, completely changed my thinking habits. I rethinked every expense before actually spending my money. Is it necessary? For whom is it necessary? Do I need the expensive version? Do I overpay? My material needs were gone. I saved every pennie I had. Sometimes I considered investing again, but that seemed too risky.

During the years before I subscribed to several newsletters about investing. One newsletter caught my attention. It was about value investing and Warren Buffett. The guy behind this newsletter had written a book about value investing and shared one chapter of that book with its subscribers for free. I read it and was stunned by the track records of the investors mentioned in the books: Benjamin Graham, Warren Buffett, Joel Greenblatt, Mohnish Pabrai and Seth Klarman. And in some way, these guys shared the same investing strategy. The shareholder returns of Joel Greenblatt stuck with me: his Gotham Capital had achieved 40% annualized returns over a period of 20 years, from 1986 to 2006 with only a small portfolio of 5 or 6 stocks. It also said something about his newest investing style: magic formula investing. I laid my hands on a digital version of Greenblatt’s book The Little Book that Beats the Market printed it and read it on the train on my way to work.

The simplicity and logic of Greenblatt’s magic formula for investing struck me. I remember staring out of the window and concluded that financial independence was suddenly within reach. A list of out of favor stocks are on the website http://www.magicformulainvesting.com so I didn’t have to calculate the earnings yield and return on capital by myself. The only thing I had to do was be patient; it’s what makes this formula unpopular, and therefor effective. So I started an online brokerage account at Interactive Brokers. At those days I also found a website called http://www.GuruFocus.com with detailed information about US companies and investments of all the big names I read about earlier. Man, I spent many hours a day reading articles and case studies, watching videos, browsing websites, printing stuff, archiving interesting information about companies. Texts which touched subjects of having a long term view, the short term orientation of hedge funds, the necessity of going against the herd and the concept of a margin of safety really resonated with me. So I thought I was ready for the job. And, I just couldn’t wait to buy my first stock.

“It’s not supposed to be easy. Anyone who finds it easy is stupid.”

This expression is Charlie Munger’s. It’s why value investing will always work; people underestimate how difficult it is to stay focused, to not get carried away and to make sure that every action to buy, sell and do nothing is based on rational analysis and a thorough decision-making process. Psychological factors will challenge you: do not miss the boat or step out, it’s getting rough or my favourite act, the price is at a 52-week low. I read it, I read it all, but I was good in selecting quotes (sometimes twisting them a bit 😕) and justifying my buy and sell actions by those quotes. So, dying for action, I bought stocks of companies like Alaska Communications Systems, Alcoa, Apollo Exucation, Chesapeake Energy, Deckers Oudoor, Digital River, Exco Resources, ITT Educations, J2 Global, J.C. Penney, Kronos Worldwide, Sears, Tempur Sealy International and so many others. In practice, my rationale to buy a stock came down to:

1) Is the company on the list of magic formula stocks?

2) Has a big name in the investing world a stake in this company?

3) Can I step in around the same price as the big investor had paid?

Sure, I also looked at the metrics of Return on Assets, Return on Capital, Debt-to-Equity ratio, Free Cash Flow and so forth. But eventually, I bought stakes in companies because a well-known investor had also invested money in these businesses and who am I to doubt them and their analysis? Hey, and the stocks certainly were out-of-favor. No doubt about that. Prices had fallen because of declining sales, falling earnings, shrinking margins, increasing pressure of government regulation and heavy debt loads for example. Life was simple back then (pun intended): if prices increased I was right and if prices fell I was offered a great opportunity to average down. And if the stock really crashed, this big investor turned out to be a [BLEEP]. I would describe my first year and a half as Buy High, Sell Low. Three or four times a day I checked the price action of the stocks I held in my portfolio. I watched the 52-week low stocks for new ideas and checked the stocks that sold for 52-week high prices for learning which shares I should have bought. Price movements of the markets in general and the shares I owned, determined my mood. Because of my poor investments returns I got short-tempered and grumpy. I wasn’t a nice person back then. This couldn’t continue so after a while I decided to change my investing strategy.

In part II of this series I will cover my second investing strategy, my investment results and the misalignment between this strategy and my character. It wasn’t a succesful period…

Latest purchase: PepsiCo

05E07AE7-EBAE-430F-9826-ED59387D0C05Today I purchased 9 stocks of PepsiCo (NYSE: PEP). I have tracked the price for some months and didn’t want to step in for a price around $110. Mr. Market got more depressed the last couple of weeks as food and beverage companies in general have fallen out of favor, and offered this great company for sub $100 prices. As expected, I waited too long (again) and got in at still a fair price of $100.45 (including transaction fee). I was eager to own a stake in this business as it’s always nice to add a dividend aristocrat to your basket of dividend paying companies.

PepsiCo has been on my watchlist for the last two years. It’s a great company with 22 $1B brands! It has a global footprint in over 200 countries. PepsiCo has a nice diversified portfolio of food and beverage products like Pepsi (Ah, I see), Gatorade, Quaker, Tropicana, Frito-Lay and much more. Their record of increasing their dividends for 46 years in a row is a proof of their sustainable business model and ability to generate free cash flow. PepsiCo continues to expect $7B in free cash flow for the full fiscal year. Their competitor Coca-Cola (NYSE: KO) has a mythical status; their brand recognition and marketing machine are exceptional (holidays are coming, holidays are coming…). Besides, uncle Warren made loads of money investing in this business. But their future shareholder returns do look a bit mediocre as compared to PepsiCo, imho. As consumer demand continues to shift towards nutritious products, PepsiCo is responding by improving the nutritional profile of many of its products by reducing sodium, added sugars and saturated fat. Pepsi also shifted their focus to the higher growth, higher margin snacks category, which should drive solid corporate results despite beverage market share weakness in general.

At the time of purchase the stock traded for a P/E of 17.5 (EPS based on the estimates of analysts for 2018). I usually wait for a lower P/E metric, say in the 15-16 range. But as always quality comes with a price. Besides, I really try to see my purchases in the bigger picture: “Does it really matter if I pay 15 or 17 times earnings for a share in a great business when my holding period is forever?” In case of a further stock price decline, I’ll gladly add more PepsiCo stocks in my beloved basket.

At the P/E ratio of 17.5, I locked in a forward dividend yield of 3.71%. They’re paying me $0.9275 per quarter. So 9 shares totals to $33.39 on a yearly basis. Not bad, not bad at all. I have to say that I’d like to buy/add stocks to my portfolio at a 4+% yield. But, I’ll get around that number if the stock price may fall further. So this is a good starting position.

As I wrote earlier, PepsiCo has rewarded their shareholders for quite a number of years. They’ve increased their dividends for 46 years in a row. Let that sink in. A continuous dividend increase since 1973. Elvis was still alive back then! You’d expect that the dividend growth rate may slow down, but after increasing their dividend with a 7-10% increase for the last 5 years, they increased it with a whopping 15.2% from their prior dividend of $0.805. This stresses the confidence of management in the resilience of their business model.

The dividend payout ratio based on analysts consensus of earnings in 2018 comes down to 65%. This is a reasonable percentage for a company with a resilient business model selling multiple A-products. I certainly don’t expect multiple 10+% increases in a row from now on. Increases of 7% would do it for me.

GuruFocus states that PepsiCo’s highest Return on Capital (Joel Greenblatt) was 69.25%. The current Return on Capital sits around 63.32% so this company surely knows how to create value. Their RoC is even ranked higher than 90% of the 102 companies in the global industry!

The company announced in February a new stock repurchase program up to $15B common stock commencing on July 1, 2018, which will replace the $12B repurchase program that is scheduled to expire on June 30, 2018. The market cap of PepsiCo is around $142B so the addition equates to more than 2%. Nice!

First article

Dear visitor,

This is my first article online, ever. I’m very excited about my decision to write a blog on my journey to financial independence. It has been on my mind for quite some time now, but I finally pulled the trigger. I’m sure it will be an adventurous journey with steep hills and valley lows, feelings of satisfaction and regret, and thoughts of conceit and humbleness along the way. At times of fear and panic in the stock markets, I’ll have to be prepared to walk alone, strengthened by the words of wise investors who took the path towards financial independence before me. While at times of greed and hysteria, lots of people will rush in the stock markets to chase the hottest companies which hopefully will make me walk on with gentle pace. Are you still with me? 😳

I really feel passionate about dividend investing as it gives me the time to build a portfolio of stakes in long existing, terrific companies. Diversification by investing in various sectors and companies in different maturity stages reduce my risk of significant loss in capital and dividend income. At the contrary, substantial price increases of the stocks that I own, leads to accumulating my wealth; I win. When stock prices fall bigly, I have the opportunity to average down or buy stakes in other terrific companies which lead to an increase in my dividend income; I win. Don’t you just love this money game?

So, what’s this blog all about? Well, if you just let me… I’ll share my buys and sells on this blog as well as my thoughts on dividend paying companies and my personal pitfalls regarding to investing. Periodically, I’ll also write about my progress towards financial independence by informing you about the increases in my dividend income and wealth accumulation.

Hopefully, visitors will feel encouraged to comment on my articles as exchanging our ideas and thoughts will sharpen our minds. I certainly do not pretend to know everything, or even… to know anything. There’s only one thing that matters for me and I think for other investors in this regard and that is: “How to become a better investor?”

Well, that’s it for now. It’s time to walk the talk. So, I’ll pick up my bag to continue my journey, step by step. I’m sure that I’ll meet some interesting fellow travellers along the way.

(End of Prelude) ☺️